Penalty Abatement Basics & Techniques Tanya Baber EA, CTRS Tax Edge

INSTRUCTOR

Tanya Baber EA, CTRS Tax Edge Tanya has been an Enrolled Agent with the IRS since 2006 and received her Bachelor’s degree in Public Accounting and Business Administration from Colorado Mesa University. Tanya practices as a public accountant from her hometown of Grand Junction, CO, and also helps clients from the east coast to Hawaii and a few internationally. Since 1994, Tanya has guided clients in the areas of accounting and payroll, personal, business, and non-profit tax preparation, planning, consulting and representation as well as solving their complex tax problems.

Course Overview ● Penalty Overview ● IRM Part 20 - Penalty & Interest ● RCA Introduction ● FTA (First Time Abatement) Program ● Reasonable Cause Considerations

Penalty Overview

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Introduction

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Introduction ● Penalties range across every type of tax ○ Most Common Penalties: ○ Estimated Tax Penalty ○ Collection Related ○ Accuracy Related ● A Few Other Types of Penalties: ○ Preparer Penalties ○ Civil Penalties (Failure to File Information Returns)

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Common Penalties

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Common Penalties

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Common Penalties

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Common Penalties – Collection IF BOTH the FTF and FTP apply then ● Penalty cannot exceed 47.5% of the unpaid tax IRM 20.1.2.2.7.3 ● However, it is nearly 50% of their unpaid tax assessed ● If they are not in compliance with filing and paying ● Interest is added – can end up being substantial

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Common Penalties – Collection

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Common Penalties - Collection

Poll Question

Reasonable Cause Assistant (RCA)

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Reasonable Cause Assistant - RCA Artificial Intelligence IRM 20.1.1.3.6 ● ‘Decision support interactive software program’ ● RCA determines if penalty relief will be granted ● Possible for an agent to override if necessary ● Often they may not know about this

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Reasonable Cause Assistant - RCA ● Agent performs other case research first ○ Apply missing deposits/payments, adjust tax, research missing extension, etc. ○ FTF, FTP, FTD ○ All others possible too, but if by oral/written still run through RCA Software ● Many references in IRM to the RCA ● Sometimes success = persistence ○ (different attempts may produce a different result)

Poll Question

First Time Penalty Abatement (FTA)

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

FTA Introduction

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

FTA Introduction Designed as a “one-time” option (May want to pursue other options first) ● Requirements: ○ Taxpayer is in compliance (Filed all required returns) ○ Owes and arranged payment (IA or Extension of Time) ○ Or if no balance outstanding, made payments against balances due in last 2 yrs (RSED) ○ Three years prior to penalty are clean + No FTF or FTP assessed + Not Significant Amount

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

FTA Instructions Obtain IRS transcripts for client ● Taxpayers can access own transcript, or others too ● Anyone enrolled in IRS e-Services can pull transcripts using just 8821 ● Circular 230 practitioners (EA, CPA, Attorney) can pull with 8821 or 2848 ● Dates to pull, for best FTA – Recommend 1990-present ● Note: Even though taxpayers can pull own transcript – can only go back 10 years. May not give them benefit if last 10 years don’t qualify – but there could be a great one going 15 years back…

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

FTA Instructions ● Practitioner: How to obtain transcripts ● Call IRS – request fax or mailed copy ● PPL Practitioners only – 866-860-4259 ● Or e-Help (Practitioners only) 866-255-0654 ● Use e-Services to pull transcripts (Store transcripts in e-Services mailbox) ● View, print, or download to import into Excel ● Can perform searches in Excel this way for codes

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

FTA Instructions ● Easiest Option: Use commercial software tool, like Canopy, to download transcripts for free ○ Canopy analyzes the transcripts and provides convenient reports ○ Big advantage – easy to see ALL FTA Opportunities!

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

FTA Instruction Transcripts in Canopy ● 100% FREE. ● 2 minutes to pull ● Digital documents ● Convenient organization ● Easy to view/print/download

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Erroneous Advice or Reliance IRM 20.1.1.3.2.2.5 ● Relates to issues too technical/complicated for layperson. ● Did they hire preparer/consultant – what is their level of understanding & knowledge ● (Tax Advisor - IRM 20.1.1.3.3.4.3) ○ Even if they hire someone, still responsible for reporting income to person hired ○ Specific relief from accuracy-related pen IRC 6662

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

FTA Instruction Reports in Canopy ● Saves you hours! ● Instant Analysis Reports ● Export reports for client ● Summary of CSED, Penalties, Interest, Payments, + more

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

FTA Instructions Practitioner: How to analyze transcript ● Look for penalty codes ○ FTF – Code 166 ○ FTP – Code 276 ● Look for this in each year for the taxpayer ○ There may be many code 276 that occur in each year ○ Add all the code 276 together for accumulated FTP

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Contacting IRS for FTA ● Complication: Can be partial removal (Partial removal is NOT full removal) ● Actual return filed to replace SFR (reduces tax, reduces penalty) ● Amended return – reduces tax due (reduces penalties) ● Only happens because base amount of tax is reduced ● How do you tell if this happened? ○ Code 161 – Reduced / Removed FTF ○ Code 271 – Reduced / Removed FTP ○ Code 197 – Reduced / Removed Interest ● NOTE: Keep in mind Interest is statutory – only recalculation of tax can produce reduction/removal of Interest

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Contacting IRS for FTA ● Practitioner: Be sure you have POA (2848) ○ Selected year you want to request FTA ○ AND 3 years prior to that year to ● Call/Write to the IRS (or help the taxpayer) ○ To call IRS + PPS (866-860-4259) + General line 800-TAX-1040 + OR: Newly released Penalty Assistance Line 855-223-4017 ext 225

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Contacting IRS for FTA ● Ask for First Time Abatement ○ For SPECIFIC tax year ○ Identify it so the agent won’t go ‘fishing’ for it ● Will use RCA software ● Should receive answer immediately ○ If approved, will go through a script with you ○ Will receive a letter (3503C) ○ Based on good history of timely filing / paying ○ Bonus: May also reduce the interest if base penalty amount reduced

Poll Question

Reasonable Cause Considerations

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Reasonable Cause ● Basically our “Good Excuse” IRM 20.1.1.3.2 ● Can request by phone but there are dollar thresholds ○ If request exceeds them – can still send written request ● Will use RCA software ● Many types of Reasonable Cause outlined in IRM (Best to reference when possible)

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Ordinary Business Care & Prudence IRM 20.1.1.3.2.2 ● Making provisions to meet obligations when reasonably foreseeable events occur. ● Facts & Circumstances – establish exercised a ‘degree of care that a reasonably prudent person would’ but were unable to comply with the law. ● Consider: ○ Taxpayer’s Reason ○ Compliance History ○ Length of Time ○ Circumstances beyond taxpayer’s control

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Death, Serious Illness or unavoidable absence IRM 20.1.1.3.2.2.1 ● For Taxpayer or immediate family only ○ Example – Spouse, sibling, parents, grandparents, children ● Issue must be addressed in a reasonable time after death or illness ● Show it caused other obligations to also be impaired (Not just the taxes) ● Need written proof of the illness or death ● Examples: terminal illness, surgery, substance or physical abuse, depression, disability, and emotional or psychological distress

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Fire, Casualty, Natural Disaster, Other Disturbance IRM 20.1.1.3.2.2.2 ● Major disasters include hurricane, tornado, earthquake, flood, riot, casualty, or other ‘emergency’ or disturbance. ● What steps were taken to comply? ● Did they comply as soon as it was possible to?

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Fire, Casualty, Natural Disaster, Other Disturbance IRM 20.1.1.3.2.2.2 ● Also – consider if creates other reasonable causes ● Example: a fire may cause ‘unable to obtain records’ ● If hospitalized due to accident ‘death, serious illness or unavoidable absence’ ● Or a declared natural disaster – IRS issues special instructions making relief available specifically for the event.

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Unable to Obtain Records IRM 20.1.1.3.2.2.3 ● Was ordinary business care & prudence exercised? ○ Why were the records unavailable? ○ Why were these records needed to comply? ○ When and how did they become aware they didn’t have the necessary records? ○ What other means were explored to secure the information? ○ Why didn’t they just estimate the information? ○ And did they comply as soon as the missing information was obtained?

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Mistake Was Made IRM 20.1.1.3.2.2.4 ● Generally, this does NOT keep with the ‘ordinary business care and prudence’ standard and doesn’t support reasonable cause. ● However - Facts and Circumstances may illustrate they did comply ○ When/how did they become aware of the mistake? ○ How did they attempt to correct? ○ Relationship between taxpayer and person relied on + If mistake was not their own and they delegated the duty ○ Did they take timely steps to correct mistake after it was discovered?

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Erroneous Advice or Reliance IRM 20.1.1.3.2.2.5 ● Was it due to a change in the law? ● Were they unable to have access to their own records? ● What is taxpayer’s own education level?

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Written/Oral Advice from IRS IRC 6404(f) and Treas. Reg. 301.6404-3 ● Written: IRM 20.1.1.3.3.4.1 – Oral: IRM 20.1.1.3.3.4.2 ● IRS required to abate penalty attributed to erroneous written advice provided by IRS ● This has been extended to include oral advice if appropriate

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Written/Oral Advice from IRS IRC 6404(f) and Treas. Reg. 301.6404-3 ● However - if they do not meet the criteria, may still qualify if they show ‘ordinary business care & prudence’ ○ Was it reasonable to rely on advice? ○ Is there a clear connection – situation – advice – penalty? ○ Prior history of tax compliance? ○ Any supporting documentation? ○ If oral – documentation? ID, date, notes, method obtained?

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Ignorance of the Law IRM 20.1.1.3.2.2.6 ● What is their educational level? ● Have they ever been subject to the tax before or penalized? ● Were there any recent tax law changes? ● What is the level of complexity of the issue in question? ● Did the taxpayer show a reasonable good faith effort to comply?

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Forgetfulness IRM 20.1.1.3.2.2.7 ● Did an oversight by them or another party cause the noncompliance? ● Generally this does NOT keep with ‘ordinary business care and prudence’ ○ Relying on another person to perform a required act generally not sufficient to establish reasonable cause ● Is taxpayer’s responsibility to file timely return and make timely deposits/payments. This responsibility cannot be delegated. ● Therefore, may not be good to rely on this as sole method to establish reasonable cause

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Undue Financial Hardship ● May support extension of time to pay ● Must be more than an inconvenience to taxpayer ○ Extension of time: Form 1127 – Application of Extension of time for payment of tax due to undue hardship ○ More than an inconvenience – Treas. Reg. 1.6161-1(b)

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Undue Financial Hardship ● Show they would sustain substantial financial loss if required to pay tax on due date ● Only affects failure to pay (not failure to file) ● Financial records required to prove ● Review ‘discretionary expenditures’ ● Were there unanticipated events or a bankruptcy?

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

Techniques ● Contact the IRS by phone or written request ● Use software to help with determination of eligibility for penalty abatement ○ Use form letters to craft written request ○ Use script to assist in calling agent ● Taxpayer: 800-829-1040 ● Professional (Only under 2848) *No requests possible with 8821 ○ PPS Line 866-860-4259 ● Both: 855-223-4017 x225 Penalty Assistance Line

Poll Question

Course Overview ● Penalty Overview ● IRM Part 20 - Penalty & Interest ● RCA Introduction ● FTA (First Time Abatement) Program ● Reasonable Cause Considerations

Penalty Abatement Basics & Techniques Tanya Baber, Tax Edge

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Penalty Abatement Basics & Techniques Common Penalties, FTA Instructions, and Reasonable Cause Considerations

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Tanya Baber

Tax Edge